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Do investors care about noise trader risk?

Author

Listed:
  • Francisca Beer

    (California State University of San Bernardino)

  • Mohamad Watfa

    (ITIC Paris)

  • Mohamed Zouaoui

    (University of Franche-Comté and LEG-UMR 5118)

Abstract

The link between investor sentiment and asset valuation is at the centre of a long-running debate in behavioral finance. Using a new composite sentiment indicator, we show that the conventional risk does not explain the abnormal returns of portfolios most sensitive to the sentiment factor. Our result supports the existence of a sentiment risk valued by financial markets. We also find that the firms more impacted by the sentiment risk correspond to difficult to arbitrage and hard to value stocks, e.g. small stocks, growth stocks, young stocks, unprofitable stocks, lower dividend-paying stocks, intangible stocks and high volatility stocks.

Suggested Citation

  • Francisca Beer & Mohamad Watfa & Mohamed Zouaoui, 2011. "Do investors care about noise trader risk?," Working Papers CREGO 1111201, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations, revised Dec 2011.
    • Handle: RePEc:dij:wpfarg:1111201
    as

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    References listed on IDEAS

    as
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    4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
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    More about this item

    Keywords

    investor sentiment; asset valuation; behavioral finance; abnormal returns of portfolios.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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